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May 29, 2012

Greek Woes Spread

Ireland, Asia feel effects; economic ‘doomsday’ fears grow in Japan

A Japanese stock board. (Photo: AP)

Repercussions from Greece’s financial troubles are affecting countries far from the Mediterranean. Not only are Spain and Italy struggling with the possibility that a Greek exit from the euro could doom their efforts to contain their own debt, Ireland worries that all it has done so far will be in vain. Farther afield, the possibility of contagion has caused growth in Asian economies to slow. Japan wrestles with its own fiscal woes, and “doomsday” scenarios induced by the Fukushima disaster are fueling capital flight.

Reuters reported Tuesday that thus far the eurozone’s efforts to contain the debt crisis are not stout enough to prevent the spread of bank runs from one country in the bloc to another. The lack of a strong enough backstop to stop such actions by depositors could threaten the entire eurozone and have repercussions far beyond the 17 nations that make it up.

Already, wealthy Greeks have begun to drain accounts and send funds to banks and investments they consider safer than Greece’s own. But they are not alone, as Italians and Spanish move their money beyond their countries’ borders. According to financial advisors, the main beneficiaries of these tactics are institutions in Geneva, London and Frankfurt.

“It's been an ongoing process, but it certainly picked up pace a couple of weeks ago. We believe there is a continuous 2-to-3-year bank run by wire transfer," Lorne Baring, managing director at B Capital, a Geneva-based pan-European wealth management firm, was quoted saying in the report. He added, "Where there is liquidity it is moving to the safest part of Europe and the perceived safest part of Europe is in the north ... It's a no-brainer."

But not all of the northern eurozone is safe, if indeed any of it is. Ireland is watching the proceedings and dreading that a Greek exit could make all its suffering under strict austerity for naught. The country’s borrowing costs have already increased on both short- and long-term bonds.

Ian Martin, a supplier of first aid and hygiene products to Irish companies, had felt that the country’s economy was beginning to recharge. However, the threat of a Greek exit from the euro and the chaos that would ensue have him worried.

In the report, Martin said, "I think if there is a major crisis, people will literally stop spending money. That little bit of confidence that was coming back will be gone. It is the last thing we need, we have done as we're told and we're still not really coming out of it. It would really just be a further nail in the coffin."

In a Bloomberg report on Tuesday, JPMorgan Chase estimated that a drop of a single percent in the economy of the eurozone would depress growth in other nations by 0.7%. Countries that export, from Britain to China, would see their business fall and Russia would see falling prices on commodities, including oil.

Even though economists and analysts are still divided on the likelihood and possible timing of a Greek exit from the joint currency, China International Capital Corp. (CICC) economists said in a report last week that a Greek exit could drive China’s expansion down to 6.4% in 2012, from 2011’s 9.2%, should policymakers fail to take effective action and if international growth drops by just half as much as it did during the crisis of 2008-2009.

China sends 19% of its exports to the European Union. CICC projected that a Greek departure could mean a drop of 3.9% in exports this year, compared with an increase of 10% if Greece remains in the eurozone.

Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse, was quoted saying in a report that a euro-region crisis would also mean that a “renewed, deep recession would be highly likely in Hong Kong, Singapore, Malaysia, Taiwan and Korea.” He calculated that exports to the euro zone account for more than 5% of total GDP in Hong Kong, Singapore, Malaysia, Thailand and Taiwan. He also said that in 2011, more than 6% of total domestic bank lending in Singapore, Hong Kong, India and the Philippines was from the euro area.

Japan, meanwhile, faces its own problems, not the least of which is the prospect of a drop in business because of a possible Greek exit. According to a Tuesday Reuters report, it is experiencing its own capital flight, with residents worried over everything from taxes and the size of the public debt to further fallout, both literal and figurative, from the Fukushima disaster in March 2011.

Currently, in keeping with the escalation of this doom-and-gloom trend, one of the hottest-selling business books in the country is titled Escape from Japan. Publishers have taken note, and ballooning offerings of books that provide advice on moving money out of the country, opening foreign bank accounts and changing currencies vie with those offering information on how to buy property abroad.

Younger people and the middle class are increasingly moving their money and buying second homes abroad in places like New Zealand, Malaysia and Singapore. According to the Malaysian Tourism Ministry, Japan outpaced Iran in 2011 in applying for the most Malaysian second-home visas. As of this March, Japan was still in the lead.

"A lot of people tell me they are worried about nuclear radiation," Hiroshi Kosaka, a real estate agent, was quoted saying in the report. "People also tell me they are worried about an economic disaster in Japan. Since November, I've helped around 25 people buy condominiums at a development in Malaysia. I would classify only three of these people as rich."

He is not the only one to see business take off; Yusuke Nozaki, chief executive of Nozaki Asset Management, specializes in New Zealand properties. Nozaki said in the report that his business has exploded, with staff tripling. Nozaki was quoted saying, “I don't expect this growth to slow."

Many of the inquiries about buying property in other countries come from housewives, said Nozaki. They reason that they can take their children and move out of the country, with their husbands following later—even if the move turns out to be temporary.

Although it is just a drop in the bucket, considering the Japanese penchant for savings, the Bank of Japan reported that in Q4 of 2011 households invested 578 billion yen ($7.28 billion) in foreign securities; this was the first outflow in two quarters. However, the overall total of household savings is 15 trillion yen.

Still, if the trend continues, according to Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch in Tokyo, "The government would be worrying about this the most because they would lose tax revenue. Flows out of the banking sector would mean banks have less capacity to invest in Japanese government debt, so we would see higher yields."